McCain's Scapegoat
Article
REVIEW & OUTLOOK
SEPTEMBER 19, 2008
John McCain has made it clear this week he doesn't understand what's happening on Wall Street any better than Barack Obama does. But on Thursday, he took his populist riffing up a notch and found his scapegoat for financial panic -- Christopher Cox, the chairman of the Securities and Exchange Commission.
Chairman of the Securities and Exchange Commission, Christopher Cox.
To give readers a flavor of Mr. McCain untethered, we'll quote at length: "Mismanagement and greed became the operating standard while regulators were asleep at the switch. The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground.
"The chairman of the SEC serves at the appointment of the President and has betrayed the public's trust. If I were President today, I would fire him."
Wow. "Betrayed the public's trust." Was Mr. Cox dishonest? No. He merely changed some minor rules, and didn't change others, on short-selling. String him up! Mr. McCain clearly wants to distance himself from the Bush Administration. But this assault on Mr. Cox is both false and deeply unfair. It's also un-Presidential.
Take "naked" shorting, in which an investor sells a stock short -- betting that it will fall in price -- without first borrowing the shares he is selling from an investor who owns them. The SEC has never condoned the practice, and since 2005 it has clamped down on short selling in any stock that shows evidence of naked shorting. The SEC further tightened its rules against naked shorting just hours before Mr. McCain excoriated Mr. Cox for doing nothing.
The rules announced Wednesday will increase penalties and close loopholes that exempted broker-dealers from the rules against naked shorting. They also make it clear that deliberately selling short a stock whose shares cannot be borrowed is fraud under the Securities Exchange Act. That's all to the good, we suppose; fraud is fraud. But regular short selling is not fraud. It adds valuable information to the market about what investors believe to be the price direction of a stock. Demonizing short-sellers as a band of criminals, or barring short-selling outright in financial stocks, as regulators in the U.K. did Thursday, removes information from the market.
Then there's Mr. McCain's tirade against the "uptick rule," a Depression-era chestnut that investors could only short stock after a rise in that stock's price. The SEC staff studied the effect of the uptick rule on prices for years, in a controlled experiment involving thousands of stocks. It found the rule had no effect. Other studies, including those that examined the uptick rule's effect on stocks disclosing bad news, also found that it "protected" no one. The SEC's permanent staff has long supported repeal and the SEC's commissioners voted to do so unanimously in June 2007.
While he was at it, Mr. McCain added the wholly unsupported assertion that "speculators pounded the shares of even good companies into the ground." It wasn't very long ago that he blamed speculators on the long side for sky-high oil prices. Then oil prices fell. Now Mr. McCain wants voters to believe speculators are responsible for driving mismanaged financial companies to ruin. The irony is that this critique puts Mr. McCain in the same camp as some of the Wall Street CEOs who have led their firms so poorly. They also want someone (else) to blame.
In case Mr. McCain is interested, overall short interest in financial companies actually declined by 20% between July and the end of August. That's right: Far from driving this crisis, shorts were net buyers of financial stocks this summer, as they must buy stocks back to close their positions and realize their gains (or losses).
In a crisis, voters want steady, calm leadership, not easy, misleading answers that will do nothing to help. Mr. McCain is sounding like a candidate searching for a political foil rather than a genuine solution. He'll never beat Mr. Obama by running as an angry populist like Al Gore, circa 2000.
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